10. Stockholders' Equity

- Preferred Stock

Covance is authorized to issue up to 10.0 million shares of Series Preferred Stock, par value $1.00 per share (the "Covance Series Preferred Stock"). The Covance Board of Directors has the authority to issue such shares from time to time, without stockholder approval, and to determine the designations, preferences, rights, including voting rights, and restrictions of such shares, subject to the Delaware General Corporate Laws. Pursuant to this authority, the Covance Board of Directors has designated 1.0 million shares of the Covance Series Preferred Stock as Covance Series A Preferred Stock. No other class of Covance Series Preferred Stock has been designated by the Board. As of December 31, 2012, no Covance Series Preferred Stock has been issued or is outstanding.

- Dividends—Common Stock

Covance's Board of Directors may declare dividends on the shares of Covance common stock out of legally available funds (subject to any preferential rights of any outstanding Covance Series Preferred Stock). However, Covance has no present intention to declare dividends, but instead intends to retain earnings to provide funds for the operation and expansion of its business.

- Treasury Stock

The Board of Directors has, from time to time, approved stock repurchase programs enabling Covance to repurchase shares of its common stock. In January 2012, the Covance Board of Directors authorized the repurchase of up to $300 million of the Company's outstanding common stock (the "2012 Repurchase Program"). This was in addition to 0.8 million shares remaining under a 3.0 million share buyback authorization approved by the Covance Board of Directors in 2007 (the "2007 Repurchase Program"). In September 2010, the Covance Board of Directors authorized the repurchase of up to $250 million of the Company's outstanding common stock (the "2010 Repurchase Program"). The Company repurchased 4.75 million shares of its common stock at a cost of $250 million under the 2010 Repurchase Program through an accelerated share repurchase which was initiated in November 2010. At December 31, 2012, there was $20.1 million remaining for purchase of the Company's outstanding common stock under the 2012 Repurchase Program. In addition to the Board approved share repurchase programs, Covance also reacquires shares of its common stock when employees tender shares to satisfy income tax withholdings associated with the vesting of stock awards.

The following table sets forth the treasury stock activity during 2012, 2011 and 2010:

	2012				2011				2010

(amounts in thousands)	$		# shares		$		# shares		$		# shares
Shares repurchased in connection with:
Board approved buyback programs	$	314,787		6,654.0	$	—		—	$	250,000		4,753.6
Employee benefit plans		8,986		207.5		8,810		158.4		6,351		115.2

Total	$	323,773		6,861.5	$	8,810		158.4	$	256,351		4,868.8

- Stock-Based Compensation Plans

In May 2010, Covance's shareholders approved the 2010 Employee Equity Participation Plan (the "2010 EEPP") in replacement of the 2007 Employee Equity Participation Plan (the "2007 EEPP"). Effective upon approval of the 2010 EEPP, no further grants or awards were permitted under the 2007 EEPP. Shares remaining available for grant under the 2007 EEPP are available for grant under the 2010 EEPP. The 2010 EEPP became effective on May 6, 2010 and will expire on May 5, 2020. The 2010 EEPP authorizes the Compensation and Organization Committee of the Board of Directors (the "Compensation Committee"), or such committee as is appointed by the Covance Board of Directors, to administer the 2010 EEPP and to grant awards to employees of Covance. The 2010 EEPP authorizes the Compensation Committee to grant the following awards: options to purchase common stock; stock appreciation rights; and other stock awards either singly or in combination. Shares granted, other than options or SARs, shall be counted against the shares available for grant based upon the ratio of 1.74 for every 1 share granted. The exercise period for stock options granted under the 2010 EEPP is determined by the Compensation Committee at the time of grant, and is generally ten years from the date of grant. The vesting period for stock options and stock awards granted under the 2010 EEPP is determined by the Compensation Committee at the time of grant. Beginning in 2012, options and restricted stock awards are generally granted with a pro rata four year vesting period, whereas previously, they were generally granted with a pro rata three year vesting period. Performance-based stock awards generally vest over a three year period. The number of shares of Covance common stock initially available for grant under the 2010 EEPP totaled approximately 4.3 million plus approximately 1.3 million shares remaining available under the 2007 EEPP at the time the 2010 EEPP was approved. All grants and awards under the 2007 EEPP remaining outstanding are now administered in accordance with the provisions of the 2007 EEPP out of shares issuable under the 2010 EEPP. The Company may issue authorized but previously unissued shares or treasury shares when options are exercised or for stock awards. There have been no grants of stock appreciation rights under the 2007 EEPP or the 2010 EEPP. At December 31, 2012 there were approximately 2.3 million shares remaining available for grants under the 2010 EEPP.

The Company recognizes stock-based compensation expense on a straight-line basis over the vesting period of the related awards based upon the grant-date fair value of awards expected to vest. Results of operations for the year ended December 31, 2012 include $40.8 million ($27.9 million net of tax benefit of $12.9 million) of total stock-based compensation expense, $20.8 million of which has been included in cost of revenue and $20.0 million of which has been included in selling, general and administrative expenses. Results of operations for the year ended December 31, 2011 include $40.1 million ($27.4 million net of tax benefit of $12.7 million) of total stock-based compensation expense, $20.0 million of which has been included in cost of revenue and $20.1 million of which has been included in selling, general and administrative expenses. Results of operations for the year ended December 31, 2010 include $32.3 million ($22.0 million net of tax benefit of $10.3 million) of total stock-based compensation expense, $17.2 million of which has been included in cost of revenue and $15.1 million of which has been included in selling, general and administrative expenses.

Options—The grant-date fair value of stock option awards is estimated using an option pricing model. The Company uses the Lattice-Binomial option pricing formula to estimate the grant-date fair value of stock option awards. In order to estimate the grant-date fair value, option pricing models require the use of estimates and assumptions as to (a) the expected term of the option, (b) the expected volatility of the price of the underlying stock, (c) the risk-free interest rate for the expected term of the option and (d) pre-vesting forfeiture rates. The expected term of the option is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior. The expected volatility of the price of the underlying stock is based upon the volatility of the Company's stock computed over a period of time equal to the expected term of the option. The risk free interest rate is based upon the implied yields currently available from the U.S. Treasury zero-coupon yield curve for issues with a remaining duration equal to the expected term of the option. Pre-vesting forfeiture rates are estimated based upon past voluntary termination behavior and past option forfeitures.

The following table sets forth the weighted average assumptions used to calculate the fair value of options granted for the years ended December 31, 2012, 2011 and 2010:



Expected stock price volatility	38%	37%	35%
Range of risk free interest rates	0.03% - 2.01%	0.10% - 3.62%	0.06% - 3.78%
Expected life of options (years)	5.2	4.8	4.7

The following table sets forth Covance's stock option activity as of and for the year ended December 31, 2012:

			Weighted Average Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in millions)

Options outstanding, December 31, 2011	3,883.2		$	51.11
Granted	1,061.3		$	48.13
Exercised	(396.3	)	$	32.01
Forfeited	(209.3	)	$	58.41

Options outstanding, December 31, 2012	4,338.9		$	51.77	6.6 years	$	32.7

Vested & unvested expected to vest, December 31, 2012	4,220.3		$	51.87	6.5 years	$	31.5
Exercisable at December 31, 2012	2,520.0		$	51.55	5.2 years	$	22.0

The weighted average grant-date fair value per share of options granted during 2012, 2011 and 2010 was $16.47, $19.87 and $18.55, respectively. As of December 31, 2012, the total unrecognized compensation cost related to non-vested stock options granted was $19.0 million and is expected to be recognized over a weighted average period of 2.4 years.

The following table sets forth the aggregate intrinsic value of options exercised and the aggregate grant-date fair value of shares which vested during 2012, 2011 and 2010:

	2012		2011		2010

(in millions)
Aggregate intrinsic value of options exercised	$	7.6	$	5.0	$	9.7
Aggregate grant-date fair value of shares vested	$	14.3	$	9.9	$	8.3

Cash proceeds from stock options exercised during the years ended December 31, 2012, 2011 and 2010 totaled $12.7 million, $6.8 million and $10.0 million, respectively. The cash flows resulting from tax benefits realized on tax deductions in excess of the compensation expense recognized for stock options exercised in the period are classified as a financing cash flow. The excess tax benefit classified as a financing cash inflow during the years ended December 31, 2012, 2011 and 2010 was $1.1 million, $0.9 million and $1.6 million, respectively. The actual tax benefit realized on stock options exercised during the years ended December 31, 2012, 2011 and 2010 was $1.7 million, $1.7 million and $2.9 million, respectively. The difference between the actual tax benefit received and the excess tax benefit for the years ended December 31, 2012, 2011 and 2010, of $0.6 million, $0.8 million and $1.3 million, respectively, is classified as an operating cash inflow.

Restricted Stock Awards—Restricted stock awards are granted subject to either service conditions (restricted stock) or service and performance conditions (performance-based shares). The grant-date fair value of restricted stock and performance-based share awards, which has been determined based upon the market value of Covance's shares on the grant date, is expensed on a straight line basis over the vesting period of the related awards.

The following table sets forth Covance's performance-based shares and restricted stock activity as of and for the year ended December 31, 2012:

	Performance-based Shares					Restricted Stock

	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value		Number of Shares (in thousands)			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2011		229.1		$	58.58		820.3		$	54.23
Granted		139.1		$	50.06		562.7		$	48.11
Vested		(82.9	)	$	58.34		(404.2	)	$	51.77
Forfeited		(21.3	)	$	55.05		(88.9	)	$	52.87

Non-vested at December 31, 2012		264.0		$	54.45		889.9		$	51.61

The blended weighted average grant-date fair value of performance-based shares and restricted stock awards granted during the year ended December 31, 2012, 2011 and 2010 was $48.50, $57.96 and $56.10, respectively. As of December 31, 2012, the total unrecognized compensation cost related to non-vested performance-based shares and restricted stock awards was $38.0 million. This cost is expected to be recognized over a weighted average period of 2.1 years. The total fair value of performance-based shares and restricted stock which vested during 2012, 2011 and 2010 was $25.8 million, $22.2 million and $16.8 million, respectively.

Employee Stock Purchase Plan—Covance had an employee stock purchase plan (the "ESPP"), pursuant to which Covance made available for sale to employees shares of its common stock at a price equal to 85% of the lower of the market value on the first or last day of each calendar quarter. The ESPP was intended to give Covance employees the opportunity to purchase shares of Covance common stock through payroll deductions. During 2011 and 2010, a total of 40,187 shares and 163,232 shares of common stock, respectively, were issued under the ESPP. Effective January 1, 2011, the ESPP was terminated.